'Service pricing should be value-based'

Bankers have different ideas when it comes to deciding on the charges to be levied for various services, notwithstanding the Reserve Bank of India's (RBI) concerns over "reasonableness" of the levies.

The whole idea of cost as the basis for deciding the price of a banking services is debunked by bankers. "The principle that there has to be a cost basis for charges is fundamentally flawed. Pricing should be determined by competition, affordability of the market and the brand you offer," the retail head of a large bank said.

A working group set up by the RBI just mentioned in its report that its findings on methodology adopted by banks for fixing the quantum of charges are clearly incomplete. It recommended that the apex bank should take suitable steps to determine and evaluate banks' costs for providing basic services.

Bankers said modern banks offer services such as ATM withdrawals, mobile banking, internet banking and provide a plush, air-conditioned environment for customers. In such a scenario, pricing should be based on the value a bank adds to the customer, they felt.

Even on the group's recommendation that basic banking services to individuals should be cross-subsidised by salvaging the unrecovered costs through higher charges to corporates hasn't been received well by the banks.

Bankers say cross-subsidisation or not, it will be taken care of by the market and in any case, why should one segment of customers subsidise another segment.

The group's report said majority of the banks had no information about the costs they incurred on the basic services "� on the whole range of their service products, for that matter. Only a small number of banks handling a small market share have the information and use it.

The question - whether the bank charges now in force are marked up high over the cost - is relevant for basic services, even in a de-regulated environment, remains unanswered.

A member of the working group representing consumer organizations made a specific observation that as per the existing RBI instructions, banks' service charges should not be out of line with the average costs of providing the services.

The cost has to be verified and for this purpose, the costs of the banks for their services should be determined to facilitate complete evaluation of the cost and service charges.

The report on the reasonableness of bank charges, submitted last week, notes that cost to the service provider was the primary test of the reasonability of the prices. However, rejecting this, bankers aver that in an open market, competition will ensure that the charges are reasonable.

Ashok Ravat honorary secretary, All India Depositors' Association, said, "This is an escapist attitude. The working group has failed to fulfil the mandate it was given. How can you determine reasonability of charges till the service cost is determined? The working group has also failed to make strong recommendations to the RBI or provide a time-frame for banks to determine their costs."

But bankers say these efforts by RBI will certainly result in transparency in the level and the manner in which charges are levied by banks.

"Any system that brings transparency to the banking system, is good for customers. What is good for customers, is good for the bank. Beyond this, the banking system will take care," say bankers.